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No rest for Kenyans as gov't plots new taxes including car circulation tax

Treasury CS Njuguna Ndungu assured IMF that Kenya would introduce the new taxes as a contingency measure

President William Ruto chairing a Cabinet meeting on July 18, 2023

National Treasury CS Prof Njuguna Ndung’u assured the International Monetary Fund that the government had contingency plans if the Finance Act 2023 fails to raise the required revenue for the financial year 2023/24.

The IMF has significantly influenced the country’s budget policies due to the strict loan conditions imposed on Kenya.

CS Ndung’u said that the government was ready to implement more taxes and revise existing exemptions to raise money in case the Finance Act 2023 fails to raise much-needed cash to fund President William Ruto’s Sh3.6 trillion budget.

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With the Finance Act 2023 suspended by the high court, and being the subject of a case challenging its constitutionality, the government may resort to the backup plan to raise required revenue.

In documents submitted to IMF, the government said some of the taxes would be revised as early as end of July 2023.

In this regard, should the approved 2023 Finance Bill result in a weakening of the revenue package (1.6 percent of GDP) underpinning the Budget proposal and/or FY2022/23 tax underperformance is larger than anticipated at the time of the submission of Supplementary II FY2022/23 Budget, we will take a number of corrective tax measures with a view to ensuring achievement of our FY2023/24 tax targets,” CS Njuguna wrote.

Some of the corrective tax measures include the introduction of a motor vehicle circulation tax and a removal of some of VAT exemptions.

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The motor vehicle circulation tax, also known as the road tax, is a tax imposed on motor vehicles by the government. The tax is calculated based on various factors, including engine capacity, seating capacity, unladen weight, and cost price.

“These measures could include: i) streamlining by end-July 2023 the VAT apportionment ratio of allowable inputs VAT on exempt supplies to align it with international practices and reduce VAT exemptions; and ii) submitting to Parliament by end-October 2023, along with a Supplementary FY2023/24 Budget, a package of legislative changes to strengthen tax collection (proposed SB)— including but not limited to the adoption of a motor vehicle circulation tax and the reduction of tax exemption on interest income,” Treasury explained to the IMF.

Despite the uproar and protests caused by the high taxation brought about by the Finance Act 2023, the IMF has praised Kenya’s effort to increase its revenue.

The approval of the FY2023/24 Budget and 2023 Finance Act are crucial steps to support ongoing consolidation efforts to reduce debt vulnerabilities while protecting social and development expenditures.

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However, recent challenges in resource mobilization and elevated uncertainty call for contingency plans that can be quickly deployed to ringfence fiscal performance going forward,” IMF Deputy MD Antoinette Sayeh said.

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